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Our Notes: Bull or Bear from here in corona times
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Indian pharmaceutical industry contributes to 20% of overall generic medicines manufactured globally. It has 22% of US FDA approved plants in the world. Over last decade it has consistently grown in size and offerings. As per industry reports, in generic medicines, one in every three in US and one in every fourth in UK is manufactured in India. Generic medicines contributes to over 70% of revenue for Indian pharma companies. Truly, Indian companies are the global factories when it comes to generic medicines owing to the availability of cheaper resources in India. However, over last three years pharma stocks have been struggling because buyers gaining more bargaining power and many countries joining this model. With Covid-19 pandemic, pharma stocks are back in focus. However this segment if not easy to crack because of complicated science, supply side disruptions, export dynamics, US FDA bans etc. There exists value traps as well as growth options. Due to corona induced pharma rally, investors are making the mistake of blindly buying anything. We have done a sector roundup analysis to come up with certain recommendations in our portfolios (both small cap & multi cap portfolios). This time we have also consulted medical professionals as part of our research. They have far more medical insights than we can have as an equity analyst into how corona virus may transform the pharma industry both in long & short terms. We are sharing part of our analysis for the benefit of ace readers via AI post.
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With lockdowns & circuit brakers across the world, it is a massive business & social experiment. Though a forced one. Leaving social experiment trends to experts, we can focus on business trends that are fast emerging from this experiment. These are our observations and not recommendations, reader’s discretion is advised.
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It has been a roller coaster ride for new investors who started investment into equities within last few years. First many were lured by the gains coming from small caps. However, it kept falling over 2018 & 2019. In year 2020, many have decided to give up stock investment or move to large caps since they have done well over last two years. The idea of today’s article was triggered after our interactions with many investors who are not sure if equity is the way for their wealth creation. Should they remain invested in small caps or invest in Gold. Should they buy real estate or should they shun equities and go for old favorite fixed deposits. There are just so many things brewing in their mind which can make them miss out on making money opportunities in future.
There is no exact science which way one should invest but it is a process which needs to be developed after considering all possible investment options available before oneself. Since the basics remain the same, we can provide you some framework to create your own model. Remember everyone is different and your own investment model has to be the one which suits you. Always try to have a clear approach and a simple to execute investment plan. Let’s go through the basics once again to clear up our mind (5-7 minutes read).
Over last two years, we have seen many moods of Mr. Market. From gloom to doom to boom and back again. Overall, bears commanded tremendous control over bulls. It is only natural that investors are loosing hope and starting to move money elsewhere. Especially those investors who started during last bull run in 2016-18 time-frame. Seasoned investors however are doing the opposite, they keep on adding more money to make bumper profit when market rebounds. But the question is when will market rebound. The easy answer is soon but investors want to know how soon 🙂
To find a realistic & probably much accurate answer, we can analyse past patterns (historical data) followed by analysis of present situation. Combining these two we can try to estimate a probable future direction. Let’s look at historical data first.
Historical Data Analysis
BSE Small Cap Performance (2003-2019)
|Year||Index @ 1st Jan||Index @ 31 Dec||Returns (%)|
Based on above data, we can deduce following patterns:
On Friday, 20th Sep 19, Finance minister announced new array of measures to stimulate economy which is slowed down back to 2013-14 levels. This is second major announcement from finance ministry to put country back on growth path. First one was to inject ₹70,000 Cr in PSU Banks which was done in in Aug’19. With new announcement, finance minister Nirmala Sitharaman surprised everyone by cutting corporate tax from 30% to 22%. Many experts are saying this is the second biggest reform since 1992. Today’s AI post is a short note on the same. Let’s analyse its impact on the GDP. It will be a two point analysis where we will look into both positive and negative aspects with a conclusion.
Stock market which had seen a rampaging bull market during 2016-17 has seen significant correction starting 2018 and it continues relentlessly. Small cap index has been hammered down by around 40% from its peak in Jan 2018. While large cap has been relatively unscathed, everything else apart from top 50 stocks have fallen like a pack of cards. As per data, around 65% stocks have fallen more than 50% over last 18 months. Only less than 10% stocks have fallen less than 20%. This means majority of stocks irrespective of the industry, balance sheet health, growth rates, have fallen during this period. A question which is often asked in times like these “Are we at the bottom?” There is no easy answer to this question. It is all about probabilities. Still based on economic patterns, one can get a logical and rationale view on it. To reach there, we need to first understand the reasons behind this downfall.
The Rise of Stock Market: 2014- 2017
Below points contributed to the rise of stock market during the early days of the last bull cycle.
- Brand New Government: In 2014 when new government came to power, people had put a lot of hopes and expected that Modi Government has a silver bullet to fix all problems. This fueled investor participation in stocks market.
- Benign Valuations: During 2014, mid and small cap stocks were trading at a big gap when compared to large cap stocks. It was overdue for reversion to the mean.
- Easy Money: Worldwide, central bankers were still printing free money which was largely lapped by big investment firms to deploy overseas emerging markets including India.
- Favourable Oil & Gold Prices: 2014-15 was a period when oil prices crashed while gold prices also saw a mini revision downwards. This reduced gap for India’s fiscal deficit and allowed some room for new government to spend on infrastructure etc.
At the Peak: Sep’17-Jan’18
- Super High Valuation: Three years of bull market had pushed market valuation at skyhigh. It was only a matter of time when it would normalize. However, such was the optimism that analysts started to value stocks with forward 2 to 3 years earnings estimates to justify valuations.
- US Fed Signaled Rate Hike: During this time, US Fed announced that it is going to hike interest rates slowly to bring them back to normal levels of 2.5% from 0%. This was the first indication of a looming crash as foreign money inflow into the stock market was largely helped by cheaper interest rates.
- Rise of Domestic Investors: By this time, we had significant money flowing into the stock market via SIPs. While FIIs were fleeing away after US Fed led rate hike started, domestic inflows kept market at elevated levels. However, with one of the driving force (FII) now dragging the market, it was only a matter of time when impact was to be seen.
- Rise in oil prices: After hovering at $30-45 per barrel, oil also started to boil due to conflicts in middle-east, sanctions on Iran oil, etc.
Crash seems inevitable if we look back at above factors which were at play during Jan’18. Hide sight analysis is easier but also a great teacher. Economy was not moving at the pace predicted by the government & analysts. It was only a matter of time that domestic flow will crack, leading to downgrade of the market.
Downhill from the top: Jan’18 till present
- Economy is still slumping: During past 18 months of market correction, the valuations have descended down to sane levels however it was now economy which played a spoilsport. With earnings falling down, the possibly benign valuations went up without any increase in stock price. Thus more correction follows.
- Oil & Gold Price on elevated levels: Oil has stayed around $55-65 per barrel and refuses to come down as OPEC cartel have learned their lessons in 2014. This put limitations on government spending power as it has to first fix the gap in fiscal deficit.
- Fed rate hike has peaked: The current interest rate at 2.25% seems to have peaked and it is making dollar costly, resulting in FIIs continuing to exit emerging markets like India.
- Government Decisions: Government has decided to impose new taxes on super rich and FPIs. These decisions on an already slowing down economy is only going to hammer down the market. While tax collection is not a bad thing but it has to be be introduced gradually by consulting impacted parties. Most of the decisions of the government has been down in isolation, leading to sudden chaos in the market. One prime example is the long term taxation on equities which woke up the bears.
- PSU Bank & NBFC crisis: Just when India needed liquidity to expand businesses and economy, there were two interruptions to liquidity. One during demonetization which crippled growth for a year. Another one came exactly after an year, the default of IL&FS & NBFCs. PSU Banks who serve majority of the banking requirements in India is cash strapped due to high NPAs. So overall even if economy could have possibly grew this stage, there was no fuel for growth.
- Trade War: Another global factor hindering economic growth globally is the US-China trade war perpetuated by Donald Trump administration. This is hurting both economies in general while certainly few US based businesses will be enjoying it since they are getting US market share back from China. Overall, people of United State will likely suffer in near term as there will be a slowdown amidst costlier products, produced locally in US.
How to get bulls back?
Promoter of a company plays a huge role in ensuring company’s success in the future. After all, promoter is like a jockey who carefully navigates company on narrow bends and accelerates on straight paths. It is therefore very crucial to have great brains behind a business. This is more important for smaller companies where promoter’s vision can help leapfrog the company into bigger leagues. Today on AI Post, we will be taking example of Wipro and its maverick chairman, Azim Premji. In a recent announcement made by Wipro, Azim Premji will retire upon completion of his current term ending June’19. Going forward, his son Rishad Premji will be taking over the reins of India’s fourth largest IT company. We will also discuss on how a villager made tons of money by investing in Wipro almost by a chance. Let’s dig deeper.
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In today’s article on AI Post, we will cover the evolution of startup industry in India and its impact on the economy. We will start our discuss from the origins of the startup culture in India and which way it is likely headed. For simple illustrations which everyone can understand, we will be taking examples of Uber, Ola and Flipkart. Same trend is getting replicated in other startups as well. A good Sunday read, which may take approximately 8-10 minutes to finish.